Affordable housing loans:Lenders' underwriting practices vital

Loans towards affordable housing will see a strong growth over the next few years and underwriting practices of lenders will be vital to controlling credit risk in India, Moody's Investors Service today said.
"Affordable housing loans present unique credit risks for lenders and - when securitised - for residential mortgage- backed securities, because of the nature of the borrowers," says Moody's Assistant VP (Research Writer) Georgina Lee.
Such loans, which are mortgages for low-income earners, are typically taken out by first-time home buyers, who are often self-employed in small unregistered enterprises or work for small companies.
Many borrowers do not have previous banking transaction records and, for the self-employed, they do not disclose their incomes or file tax returns. As such, the formal documentation or records needed to verify income and the ability to service loans is absent.

"In this context, the underwriting practices of lenders - housing finance companies (HFCs) - are vital to controlling credit risk," Lee said.
In a report, Moody's said the underwriting practices of lenders are vital to controlling credit risk in India's 'affordable housing loans' segment which is set to grow strongly over the next few years as the government tries to increase home ownership among underprivileged groups.

"Some key credit considerations for HFCs when they originate affordable housing loans include income assessments and the quality of the construction firms involved when the loan is for the purpose of funding an individual's purchase of a home," Lee said.

Some HFCs prefer to extend loans to the specific building projects of construction firms that they have pre-approved.
For operational and credit risk control of HFCs when underwriting affordable housing loans, Moody's said Know Your Customers (KYC) guidelines should be looked into.
HFCs follow the KYC guidelines set by their regulator, the National Housing Bank (NHB), to verify the identity of borrowers, an important initial step, given the lack of documentation typically associated with affordable housing loans.
In recent years, HFCs have also started using e-KYC -- using online verification to check a borrower's 12-digit unique identification number called Aadhaar -- to help them minimise the risk of identify fraud and document forgery.

HFCs are the main affordable housing loan lenders in India - banks are reluctant to lend to the sector because of the lack of documentation .
The affordable housing loan market is forecast to grow to Rs 4-8 lakh crore (USD 60-120 billion) by 2022 from Rs 59,300 crore in March 2015, bolstered by government measures. Affordable housing loans accounted for 14 per cent of the total home loan books of HFCs as on March 31, 2015, Moody's said.